The Impacts of China’s Shadow Banking Regulation Intensity on Bank Risks

The impacts of shadow banking regulation on bank risks remain inadequately understood in existing literature. To address this gap, we develop a comprehensive index of China’s shadow banking regulation intensity through textual analysis and machine learning techniques to empirically examine regulatory effects on banks’ multidimensional risks. Analyzing data of 181 commercial banks from 2007 to 2020 in China, we demonstrate that intensified shadow banking regulation leads to higher risk, manifested by more non-performing loans, lower profitability, and more conservative practices, as indicated by higher loan loss provisions and lower liquidity risk. The findings remain robust across multiple endogeneity and robustness tests. Mechanism tests confirm that the channel behind these effects is that tighter shadow banking regulation curtails banks’ shadow banking business. Moreover, expansionary monetary policy attenuates the economic costs of regulation and vice versa. These findings provide insights for authorities to enhance the effectiveness of regulatory policies. JEL Classifications: E61, G18, G21